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24 March 2017

As UK Parliament Gives Approval for Brexit, House of Lords Continues to Push for a “Comprehensive” Trade Deal with the EU

On 13 March 2017, the UK Parliament passed the European Union (Notification of Withdrawal) Bill 2016-17 (the “Brexit Bill”) granting approval for Prime Minister Theresa May to trigger Article 50 of the Lisbon Treaty to initiate the UK’s exit from the European Union. On 20 March 2017, the UK’s permanent representative to the European Union informed the EU that Mrs May plans to send a formal notification invoking Article 50 on 29 March 2017.

This will set in motion the two-year negotiation process that is expected to culminate in the UK’s definitive exit from the EU at the end of March 2019.

As Hong Kong traders are well aware, the fate of UK trade relationships has been of major concern since the outcome of the Brexit referendum last summer. In February 2017, the government published its White Paper providing a formal plan for Brexit. In response to questions, the UK Secretary of State for Exiting the European Union, David Davis, then confirmed that the UK would certainly be leaving the EU customs union.

The House of Lords’ European Union Committee expressed its misgivings about this move in a report titled “Brexit: trade in goods” (the “Brexit Report”) published on 14 March, which highlights the importance of reaching a “comprehensive trade agreement with the EU.” The report covers the UK’s trade in goods from the standpoint of UK manufacturing, imports and exports, tariff and non-tariff barriers and related costs, preferential trade with third countries, as well as the overall business and investment climate. It builds on the Committee’s previous report, “Brexit: the options for trade” published on 13 December 2016.

The trade in goods between the UK and other EU nations is substantial: accounting for 54% of the UK’s imports and 60% of its exports in 2015. The Brexit Report underscores that if no trade agreement is reached during the Brexit negotiations, trade between the UK and the EU will return by default to generalised WTO rules. It analyses the consequences of the resulting tariffs on six major industries: chemicals and pharmaceuticals, oil and petroleum, food and beverages, machinery and capital goods, aerospace and defence, and automotive. The House of Lords concludes that such tariff barriers would pose a considerable burden on these sectors.

Hong Kong traders will also likely not fail to see the implications of their trade in goods entering the UK market via other EU countries. Such goods may become subject to any of the aforementioned trade barriers.

The Brexit Report also considers the potential effects of non-tariff barriers to trade following Brexit, including rules of origin and other regulatory requirements. Traders from Hong Kong wishing to trade with both the UK and the EU will be pleased to learn that the Brexit Report strongly supports the UK government’s initiative to retain the EU regulatory framework currently in force even after Brexit through the Great Repeal Bill. This future legislation will ensure that, at least in the early days of Brexit, the regulations relating to the import of goods into both regions will remain harmonised. In particular, the House of Lords has highlighted the importance of maintaining conformity with the Registration, Evaluation, Authorisation and Restrictions of Chemicals (“REACH”) Regulation for trade with the EU and third countries.

While the Great Repeal Bill will preserve the current regulatory regime relating to imported goods, EU and UK requirements will nevertheless begin to diverge as each jurisdiction passes new regulations after Brexit. The Brexit Report cautions that diverging legal regimes may constitute significant non-tariff barriers, as traders around the world may potentially need to bring their goods into conformity with two increasingly different sets of standards.

The Brexit Report notes, however, that retaining consistent product standards between the UK and the EU will necessarily be very difficult. It would likely require drafting legal provisions to ensure some form of mutual recognition or harmonisation between EU and UK legal regimes, and potentially the creation of a mechanism to oversee and/or resolve disputes relating to standard setting. The Brexit Report also comments that it may benefit the UK to remain part of certain standard-setting agencies, such as the European Chemicals Agency (responsible for the REACH database) and the European Medicines Agency.

The Brexit Report also considers the negative effects on trade that would result from the establishment of a physical customs barrier between the UK and the remaining EU countries. Specifically, a return to customs checks across this border would result in added costs to businesses and traders due to delays, added procedures and added administrative burdens. EU importers buying goods from regions outside Europe, such as Hong Kong, will need to consider these extra costs if goods are also intended for distribution into the UK. While the Report states that Mrs May has proposed a “customs agreement” to mitigate these effects, it cautions that there is no precedent for an agreement short of a customs union that would completely eliminate the need for customs checks and the associated costs.

Finally, and perhaps of significance to traders operating out of Hong Kong, is the Brexit Report’s analysis of third party trade agreements. The House of Lords observes that the UK will likely not be able to remain a party to the preferential trade agreements that the EU has negotiated with third parties, such as South Korea or Switzerland. Until new FTAs are renegotiated those countries will lose their preferential status with the UK, placing them on a level playing field with countries that were never part of any such agreement with the EU. Moreover, this period of renegotiation may open new opportunities for the UK to conclude trade agreements with other parties. The House of Lords has, however, cautioned that renegotiating an FTA with the EU must be prioritised over attempts to negotiate deals with new trading partners.

The main conclusion of the Brexit Report is to urge the UK to attempt to conclude an FTA with the EU as quickly as possible – ideally before Brexit. While acknowledging that achieving a deal within the two year deadline before the UK leaves the EU is ambitious, the Report stresses that some form of transitional agreement must be put in place to avoid the negative effects on trade that would result from a return to the application of only WTO rules between the UK and the remaining EU Member States.

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